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  3. American Economic Review
  4. June 2006
  5. Media Frenzies in Markets for Financial Information

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Media Frenzies in Markets for Financial Information

  • Laura L. Veldkamp
American Economic Review
vol. 96, no. 3, June 2006
(pp. 577–601)
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Abstract

Emerging equity markets witness occasional surges in prices (frenzies) and crossmarket price dispersion (herds), accompanied by abundant media coverage. An information market complementarity can explain these anomalies. Because information has high fixed costs, high volume makes it inexpensive. Low prices induce investors to buy information that others buy. Given two identical assets, investors learn about one; abundant information reduces its payoff risk and raises its price. Transitions between low-information/low-asset-price and high-information/highasset- price equilibria resemble frenzies. Equity data and new panel data on news coverage support the model's predictions: Asset market movements generate news and news raises prices and price dispersion. (JEL D82, G12, G14)

Citation

Veldkamp, Laura, L. 2006. "Media Frenzies in Markets for Financial Information." American Economic Review, 96 (3): 577–601. DOI: 10.1257/aer.96.3.577

Additional Materials

JEL Classification

  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 Information and Market Efficiency; Event Studies; Insider Trading
  • O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
  • P34 Socialist Institutions and Their Transitions: Financial Economics